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E-commerce dominates as key issue in symposium Back  
The changing role of corporate treasury was the topic of a symposium conducted by FInance amongst a panel of leading Irish bank corporate treasury figures.
Donie Kerin, head of Treasury Sales at ABN AMRO

E-commerce and globalisation of trade
The rapid expansion of the internet and other e-technology into the market place makes it possible for corporates to expand their client base far beyond the traditional frontiers, increasing the level of risk to be managed within a treasury department. As a consequence this has lead to consolidation on a global scale in many industries. A key challenge facing treasuries will be the integration of treasury functions in the aftermath of M&A activity.

E-commerce and banking relationships
The old parameters which were used by treasurers to determine the quality of a banking service provider are to a large extent no longer valid. Personal service, speed of pricing and execution are being replaced by electronic processes. The banks which will be considered the best business partners will be those that can provide the required services electronically using systems that can link up effectively and efficiently with the corporates own systems. Assessing the technical quality of service will be difficult for traditional treasurers.

Post EMU markets
Despite the euro being almost two years old there still exist treasury products which have retained the attributes and conventions which pertained prior to the introduction of the euro and which were largely peculiar to individual countries. An example is the commercial paper market which still has a large number of issuers which are not rated and paper is regularly issued which is not deliverable through Cedel or Euroclear. The result of this is that we still have 11 local markets for ECP rather than one single pan-European market with a single set of rules and market practice.

Product pricing and bank capital adequacy
All participants in the financial markets are aware of the Bank for International Settlements requirements for banks to reserve capital to support activities which involve counterparty risk. In the past this was only an issue for banks which were constrained due to lack of capital. These banks were forced to be selective in their dealings to utilise their capital to generate the highest possible return. Many banks however could be rather complacent in this regard because they had considerable levels of surplus capital. This situation has changed somewhat because banks are much more focussed on returns to shareholders. In addition, the banking industry itself is undergoing consolidation and the creation of shareholder value is determining whether a particular bank is predator or prey in the process. Some banks have returned capital to shareholders to be more efficient with resources. Undoubtedly managing capital as a scarce resource will lead to higher prices for treasury products.

Documentation and bank capital adequacy
Arising from the necessity for banks to price in the cost of capital to support transactions due to BIS constraints, new mechanisms are being introduced to traditional products to reduce the amount of capital which is required to support them. Such mechanisms include mutual put clauses and mark to market clauses. The use of these clauses has added to the complexity of documentation and increased the workload of the treasurer in this regard.

Derek Keogh manager - Corporate FX Desk Anglo Irish Bank

Sterling and the euro?
Given the continued debate with the British political parties on the pros and cons of sterling joining the euro, the timing of its entry into the euro remains uncertain. This has provided sterling further strength as it holds its safe haven status. The rejection by Denmark to join the euro will fuel the UK debate further. Many corporate treasurers and financial controllers will have to decide on a pricing policy which takes into account the strength of sterling but also allows them to take advantage of any favourable movements. We feel that corporate treasurers hedging GBP receipts should consider a mix of forward rate hedging and derivatives to ensure an ‘average rate’ is achieved.

Continued dollar strength and oil prices
Energy prices look unlikely to fall dramatically over the coming months despite OPEC’s recent actions. This compounded by the strength of the dollar will have a major impact of the cost management of any organisation engaged in manufacturing or distribution. The strength of the dollar will also have a major impact on the cost of Irish subsidiaries of US Corporations overheads.

Currency hedging policy going forward
Given the high levels of volatility in the recent months, and the lack of clarity in the direction of the major currencies, corporate treasurers may have to re-consider their organisation’s hedging policy. Our experience is that many exporters are now hedging on a short-term basis, to take advantage of continued Euro weakness. However, there is now a need to monitor rates regularly throughout the day

Fixed or floating interest rate policy
Corporate treasurers have a dilemma, all yield curves are relatively flat. It is difficult to know whether we have reached the highs of interest rates globally, given the uncertainty of oil prices. At the time of writing, the futures markets are only pricing in a rate hike in Europe of 0.25 per cent by year end, with US & UK rates looking unchanged. However, current levels of EURIBOR should provide many corporate treasurers with an opportunity to obtain cheap fixed rate finance, when compared historically. Corporates who have cash holdings are likely to need to look at investing in structured money market deposit products to ensure that if the yield curve steepens, they can take advantage of additional interest income.

The increasing number of automated bank systems will assist the corporate treasurer’s role greatly in making decisions. The major issue for the treasurer is how can they ensure that their systems are compatible with the bank systems, and that they are satisfied that the system is secure and used by authorised personnel.

Ciaran Kane, head of Corporate Sales, Bank of Ireland Treasury & International Banking

Business organisations have traditionally been organised by function - sales, production, finance, since the beginning of the modern corporation. The original thinking was that decision-making should be centralised and specialised, and that skill sets appropriate to one discipline were quite different from those in other functions. The corporate treasury function, which evolved in the 1970s, met a growing need for a specialist competence in financial matters within the traditional accounting function. For many years, the role of the corporate treasurer could be best defined as making sure that the correct amount of money, of the correct type, was in the correct place at the correct time at an acceptable cost and risk.

Changing role
In recent years, the role of the corporate treasurer has greatly expanded to provide advice and expertise in areas as diverse as pensions, receivables and payables and fraud and security issues.

The key issue, above all others, facing corporate treasurers today is the very nature of the role that they perform. Increasingly, corporate treasurers are utilising a combination of technology and outsourcing to replace much of the basic processing with value-added decision-making to better manage their company’s money. Their role will expand to incorporate such subjects as risk management, shareholder value, corporate finance and capital markets, mergers and acquisitions and technology, if it hasn’t already done so.

In the future their new role may be as a manager of enterprise risk. Where today they purchase financial instruments to hedge against the future; tomorrow they will be expected to assist business managers in identifying and managing all the risks involved with launching new products or businesses globally. This expanding role is reflected in the decision of the Treasury Management Association in the US to change their name to the Association of Financial Professionals in 1999.

Web-based technologies
Closely linked with the changing nature of the corporate treasurer’s role is the issue of technology and its impact on the treasury environment. In particular the move to web based technology provides the corporate treasurer with access to large quantities of relevant information and data. It also provides them with the capability to transact business online. In a survey for the Association of Financial Professionals, while 13 per cent of respondents conducted some financial transactions on the web last year, 54 per cent said that they were likely or somewhat likely to do so within the next two years.

This gives rise to another significant issue for treasurers, the security of web based systems. Security concerns have been addressed by use of 128 bit encryption (highest specification commercially available globally) and digital signatures.

A key aspect of web based technology is it’s democratic nature. Unlike previous treasury technology that was limited to large multinationals by virtue of their spending capacity or their banking relationships, the internet will facilitate the transfer and delivery of information and best practices to small companies as well.

Shifting power
From a corporate treasurer’s viewpoint, the e-business revolution is causing a significant shift in the power balance between consumers and suppliers of treasury services. The consumers (i.e. corporate treasurers) are in an ever-increasing position of strength to dictate what they want to buy, from whom and on what terms. This applies right across the product spectrum from spot foreign exchange to complex derivative structures to middle and back office processing functionality.

Increasingly stringent audit and disclosure requirements are a significant issue for the corporate treasurer, and likely to increase in significance in the future. Audit practice is moving from reconciling the books at year-end to focusing closely on internal controls. This will ensure robust ‘early warning systems’ trigger senior management involvement before problems develop. FRS 13 is just the latest accounting standard designed to make financial reports more transparent. If developments in US accounting standards are replicated here there is likely to be a considerable increase in disclosure requirements going forward.

Finally, a key issue to be addressed by corporate treasurers is the nature and scope of the relationships that they have with their banking and financial services providers. As companies consolidate their banking relationships into a few key partnerships these relationships will become deeper and broader than in the past. Products will become increasingly commoditised and a greater emphasis will be placed on the quality of service provided.

Banks will become part of a wider strategic alliance for many companies. In turn, banks will focus on the types of customer that they want to do business with. Already, some of the larger U.S. banks will not deal with companies below a certain size i.e. they are focusing on key global partnerships going forward. In addition, the ongoing consolidation in the banking industry will inevitably mean fewer and larger players in the future.

John Rice, AIB Treasury and International

E-commerce is the buzzword at the moment in corporate treasury with each of the banks set to launch their own proprietary FX trading sites over the next few months. Internet FX trading has really taken off in Scandinavia and we expect the same thing to happen in Ireland. After three years Scandinavia has a take up rate of in-line FX trading of between 50 - 70 per cent for smaller transactions (up to stg?50,000). However e-commerce is only providing another channel for treasury transactions, the link between the dealer and the corporate treasurer are still going to be there. What we expect to see is that for bigger transactions, like hedging decisions, companies will still want the dealer to interpret the market for them. We see e-commerce as taking much of the paper flow out of corporate treasury decisions but that the human link will very much be maintained. As the technology progresses treasurers will be able to do all of their cash management from one internet site.

Since the introduction of the Euro, some companies that had been managing several pairs of currencies reduced the numbers they were managing. Because of this we have seen that some companies have tended to down grade their treasury functions.

AIB have been concerned by this, particularly in middle corporate Ireland and we’ve been urging companies to put treasury back on the agenda. We’re linking up with Arthur Andersen in mid October to host a breakfast for directors to urge them to do just that ‘Treasury issues for directors.’ Middle corporate Ireland needs to be reminded of the importance of the treasury function.

Another factor is that the treasurers function is changing within companies themselves. While some seem to be widening the brief of the treasurers others are downgrading it.

Corporate governance
Regulatory issues are becoming more and more important to corporate treasurers as the legal framework changes. Ireland’s FRS13 (Financial Reporting Standards 13) means that companies have to declare what they are doing to manage their risk, and disclose more about the contracts they have.

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